SEP to traditional to Roth?
Can a sole proprietor contribute the maximum amount to their Roth IRA, also contribute to a SEP IRA, rollover some SEP funds to a traditional, and also convert some Traditional IRA funds to a roth in the same year?
Example: In 2007
In January $4,000 was added to the Roth IRA (2007 contribution)
In Feb $2,000 was added to their SEP (2007 contribution) bringing the current balance to $2,000
In Mar $2,000 was rolled out of the SEP into a traditional IRA (SEP reduced back to $0)
In Oct $2,000 was converted from the traditional IRA to the Roth IRA
A financial advisor has told me this can be done each year, using a SEP to get more money into your ROTH IRA. They said it was no different than if you rolled your 401k from a job you left into a traditional IRA and the next month converted that traditional IRA to a Roth IRA.
I understand taxes would be paid on the conversion. Are there any other applicable rules or violations here?
Could you please list a reference? Thanks for the help.
Tracy
Permalink Submitted by Alan Spross on Tue, 2007-10-09 19:33
This can be done as long as each individual contribution qualifies under it’s own separate regulations.
For example, the SEP contribution requires correct calculation of the deductible contribution amount, the Roth requires that the modified AGI for Roth contributions is not exceeded, and the Roth conversion requires adherence to the 100,000 modified AGI limit. You cannot be married filing a separate return.
There is no reference source that combines the actions you propose and authorizes them. You must simply take each transaction by itself to be sure that the requirements are met, however Pub 560 p. 6 does state that “Employer contributions to a SEP IRA will not affect the amount an individual can contribute to a Roth IRA.”
If you do not to the SEP rollover by direct transfer, be sure that you do not violate the one rollover per 12 month limitation per IRA account. The Roth conversion itself does not count as a rollover for purposes of that limitation.